Investment banking is a highly profitable business. Goldman Sachs, perhaps the most prominent investment bank in the world, raked in $32 billion during fiscal 2017 with the majority of this revenue driven specifically by investment banking. Yet arguably, much of the value that is provided by Goldman in the investment banking sphere is in need of tech disruption. Bankers get paid whopping salaries and bonuses due in part to information asymmetry, as they are needed to facilitate the capital raising process. Currently, for large issuers of securities, you simply have to use investment bankers. It is pretty much a given.
Blockchain and the rise of digital assets may be poised to change all of this. Sure, we are still in the early days of the cryptocurrency euphoria with far too many scammy issuers, but we are already seeing the formation of a professionalized service sector that will help facilitate regulatory compliant issuance of blockchain based securities.
Take tZero for one. Founded by crypto champion and founder of Overstock Patrick Byrne, tZero is in the midst of its own initial coin offering (ICO) that is effectively preferred equity and perhaps some additional utility like discounts on trading on the tZero platform. One tZero commenter called the company “Wall Street 2.0” as they fuse the traditional finance world with the bold, innovative crypto community. This vision of a blockchain based trading platform that can facilitate all sorts of securities simply makes sense.
One of tZero’s partners in the crypto-sphere is another very interesting platform: Polymath, sometimes described as a securities token in a box.
Polymath has already raised a private sale initial coin offering (PLY) while skipping over a public ICO. Instead of doing a public ICO, Polymath decided to “play Santa Claus” and spread some crypto love with an Airdrop that saw their Telegram users hit the 50,000 ceiling (at that time).
Disrupting Goldman Sachs
There is plenty of hype in the crypto space, and Polymath has received its fare share, but its mission is pretty straight forward: it wants to disrupt Goldman Sachs and pretty much every other investment bank out there. And why not? Blockchain is the perfect vehicle to power this type of disruption.
When you go to an investment bank, to raise debt or equity capital, the bankers spin their story as to how they can quickly and easily sell your security to their book of investors. Meetings are held, documents produced, conference calls take place, and the security is pitched to investors far and wide. But this takes a good amount of time, and don’t forget, a lot of money, but hey, it’s what you gotta do.
So what happens in a ICO?
If an ICO is popular you can raise hundreds of millions of dollars in the blink of a eye. No expensive banker with their nice suits and polished shoes necessary. Heck, Filecoin raised a mere $135 million in the first hour. And where was Goldman Sachs or any other investment bank during this? Sorry. Their services were not required. Polymath “enables trillions of dollars of securities to migrate to the blockchain,” claims their website. Is this just early stage hubris?
Polymath the Securities Token Platform
Wall Street is on the verge of the grand disruption and, honestly, it is about time. The internet is chewing its way through all sorts of industries and distributed ledger technology may make a meal out of lower Manhattan.
Recently, Crowdfund Insider had the chance to hop on the phone with Polymath CEO and founder Trevor Koverko from his office in Toronto. I asked him how he came up with the concept of Polymath and he explained it was a classic case of solving their own problems.
Koverko was working in private equity. His job was to help buy tech companies and then roll them up. At the same time, he became engaged with the cryptocurrency world and wanted to merge his two passions of securities and crypto. Ultimately, he did not pursue this because it was simply too difficult to do. And it would have required a lot of time and lot of money because there was not yet an existing path. Eventually, Koverko decided it would be better to solve the bigger problem instead of the smaller one and boom: Polymath was born. Koverko became a crypto trailblazer.
“I bankrolled it for the first year,” said Koverko. “It was a gradual, but exponential growth curve. It just kind of exploded.”
I asked Kevorko if he wanted to replace the full stack of completing a private or public placement including legal advice, the bankers, the trading platform and more. And he said I was close, but Polymath is a bit more narrow.
Polymath wants to support the tech aspect of the sale, to empower the issuer to be completely compliant, all on the Blockchain. And the regulators should love it.
“The way I like to describe it,” explained Koverko. “We see this mega-trend emerging. We see this tsunami. This massive demand for asset backed tokens. Right now you have Utility tokens dominating the space. We see the next wave of tokens being security tokens backed by something that has some kind of profit baked into it.”
I asked him if he would like to put Goldman Sachs out of business and he said that was a good example of the market they want to go after. Polymath wants to be a protocol of sorts, kind of like Ethereum.
Kevorko shared a story about a Credit Suisse event that he attended as a panel moderator. He said he hijacked the discussion a bit and asked his panelists about security tokens and where they would be in a few years. 1%? A fraction of 1%? What did they all think?
“Joey, a technology guy, said 95% securities,” said Koverk. “Do you know what the implications are of that? Trillions of dollars of assets. Real Estate, equity, everything will go to Blockchain.”
Everything means, well, the entire universe of securities … you name it.
Tokens are a superior form of ownership than stock, shares, units etc. Tokens are better because you can program them to issue dividends automatically, hold proxy voting and eliminate your (expensive) back office staff. Tokens are faster and more efficient. You can complete KYC automatically. Compliance can be fully automated.
This new form of fundraising will be used by all companies to raise capital. Globally.This new form of fundraising will be used by all companies to raise capital. Globally #ICO #Cryptocurrency #BlockchainClick To Tweet
Polymath has just recently completely their own funding round with a private sale using a Simple Agreement for Future Tokens (SAFT). Polymath raised $58,719,888, according to the Form D filed with the Securities and Exchange Commission. This should give them sufficient firepower to execute on their mission. Interestingly, the round also helped them decide to skip over the public ICO and do a free Airdrop of tokens. When that was announced, Polymath “melted servers,” according to Koverko.
When the Airdrop was announced Polymath 'melted servers' #CryptocurrencyClick To Tweet
“We wanted to keep the sale very conservative,” explained Koverk, talking about the decision not to do a public ICO. “We are not a professional fundraising company. We are business. A community. We could have broken records but we decided to focus on building our community.”
Koverko said the demand for the tokens was crazy. They were the first platform to hit the ceiling of 50,000 subscribers on Telegram (a ceiling that has since been raised). He described the Polymath community as being, by definition, the health of the network. By doing the Airdrop it was a fast way to get distribution but at times it was a bit crazy. Koverk said that Jor Law of VerifyInvestor was instrumental in making the distribution go smoothly. They did KYC on everyone. 10 million tokens were issued.
So what’s next?
After reading a Polymath presentation from several months back, I asked Koverko if he still intended on issuing at least one securities token each week. He said things have changed since that statement:
“We are more ambitious since we said that. We are planning to release a standard soon. I was involved with the Ethereum project and I realized and saw first hand how important it was to standardize. ERC20 was very important … Hockey stick as soon as it emerged. We will release this standard for security tokens. We will not have to advise issuers.”
Koverko said that today, the Dapp market hovers around $100 million and is twice the size of the security token market. Polymath expects that in a decade the Dapp token market will be $500 billion while the security token market will be 20 times the size at $10 trillion.Polymath expects that in a decade the security token market will be at $10 trillion #ICOClick To Tweet
The one platform to rule them all
Koverko is swinging for the fence on this one. He says they have a “ridiculous pipeline” in the queue. Over 15,000 issuers have signed up. This could make the US IPO market look like chump change.
Polymath has a 'ridiculous pipeline' in the queue. Over 15,000 issuers have signed up #ICOClick To Tweet
“There have been about 1300 ICOs so far. We have our work cut out for us.”
“tZero is number one,” Koverk stated. “We are excited to flesh out our relationship. We have a very obvious relationship. We need each other. We love BnkToTheFuture and Simon Dixon. We need a lot of help to coordinate Security tokens sales.”
A misconception I had was that Polymath was going to be an exchange but that is not the case and where tZero fits in. They are building a protocol that helps exchanges.
“There are not that many securities tokens that exist. The main reason is lack of liquidity. Zombie tokens. No one will touch you. There needs to be off ramps. Liquidity makers. If we can build a protocol that other exchanges hook into we can win a lot faster.”
Polymath will hook into exchanges that are regulatory compliant. This will give confidence to investors, issuers and regulators.
Recently there have been numerous stories in the news about exchange hacks, like Bitgrail and Coincheck, and lax cybersecurity. I asked Koverko if this was a concern.
“I think this is the number one most important thing to get right. We are using best practices as we are launching … on top of established secure tech stacks. Ethereum is the most established platform out there … This helps us protect Polymath’s network.”
Being based in Canada, Ontario specifically, I asked him about his relationship with the regulators – the Ontario Securities Commission (OSC). Koverko said they have engaged with the OSC and emphasized they are not an issuer but an enabler. PolyMath provides people the tools to launch a token. Koverko added that a lot of companies that will be launching on Polymath are companies we would all recognize. These private offerings will soon be followed by public companies.
Reflecting on the recent statements emanating from the US Securities and Exchange Commission and the Commodity Futures Trading Commission, Koverko was complimentary of the approach by US financial regulators:
“I am not a lawyer but that is all that I have been involved with the last year. The SEC exemptions and the regulatory stuff. First of all, I want to commend the regulators. They have not been too hands on. The American ones have been great. They have let this innovation continue. Think of the early internet. We need a petri dish of crazy-ness … I think they recognize you need a little wild west to let this emerge.”
Koverko shares an opinion held by many others that many of the utility tokens that have been issued have been masquerading as utility tokens. Koverko believes that some of these tokens may need to become security tokens retroactively.
“I think this is why we have a lot of demand,” Koverko said.
Polymath is currently preparing for their sold out PolyCon event, being held in Nassau, Bahamas at the end of February. Expect a slew of announcements emanating from Polymath toward the end of this month. After that, it is all about execution and scaling the Polymath future of security tokens.